SET Index gains as 'shutdown' winds down

The SET Index gained 3.7 per cent in the last two weeks to close at 1,352 on March 6.

It outperformed regional peers, represented by the MSCI Asia ex-Japan Index, which rose 2.2 per cent. Foreign investors turned net buyers with a net-buy position of Bt3.5 billion.

There was some relief for Bangkok residents last week after protesters decided to end their “shutdown” campaign. Leading the gains were stocks in property (on speculation of a policy-rate cut by the Bank of Thailand this Wednesday), banks (bargain hunting) and tourism (end of the Bangkok shutdown).

There is growing pressure on the BOT to cut the key policy rate again as recent data indicate domestic demand remains weak. The Bangkok shutdown may have ended but there is still no clear sign of an end to the political deadlock. As a result, consumer confidence is still falling and will drag down growth of gross domestic product. Export growth is the only bright spot currently.

The BOT is due to revise down its GDP growth forecast for 2014, possibly to below the 2.9-per-cent point seen last year. And the central bank has also recently changed its rhetoric on household debt, suggesting it eased in late 2013. These seem to hint at a rate cut this week.

However, at the same time, the BOT understands that a rate cut may not be effective in boosting domestic demand. What the economy needs now is a functioning government. As long as the political deadlock persists, public investment is going to be weak, and this is unlikely to trigger a recovery in confidence among consumers and business owners.

The previous policy-rate decision was a close call. It is going to be another close call this week and we will monitor the policy statements closely for hints of future direction. At this juncture, we still think the BOT may just keep its key rate at 2.25 per cent this week.

The aggregate net profit of listed companies under DBS Vickers’ coverage grew 5.9 per cent in 2013. Looking forward, we have cut earnings-growth estimates for 2014 to 9.0 per cent (from 12 per cent previously) as analysts are making more conservative assumptions amid the slowing economy. Currently, the Thai market is trading at 12.6 times FY14F price to earnings, slightly below its historical average of 13x.

We recommend overweighting the electronics, shipping, tourism, and telecom sectors.

The Stock Exchange of Thailand Index has extended its relief rally after protest leader Suthep Thaugsuban’s decision to end the seven-week “Bangkok shutdown” and relocate anti-government protesters to just one site – Lumpini Park. However, Thailand is certainly not out of the woods yet and there remains a strong chance of new political shocks over the next few weeks.

A key risk for the Thai market is a violent red-shirt reaction to a potential judicial coup that removes Prime Minister Yingluck Shinawatra and her caretaker government from office. Interestingly, the Army has set up 176 checkpoints and stationed more than 5,500 soldiers in Bangkok. The official explanation is that the troops are ensuring the safety of both protesters and civilians. However, some political observers believe that the latest troop movements are a prelude to wider military intervention if the red shirts stage violent protests in response to the Senate or Constitutional Court removing Yingluck from office, leading to the appointment of an interim administration (perhaps headed by a well-respected technocrat).

The good news is that the governing Pheu Thai Party and Suthep’s People’s Democratic Reform Committee are now talking to each other to find a way out of the current crisis. Accordingly, the level of hate speech and number of shootings and grenade attacks have sharply fallen in recent days, as have news reports about Thailand edging “towards civil war”.

Reduced political tension is very positive news for tourism plays, and several of these such as AOT (Airports of Thailand) and CENTEL (Central Plaza Hotel), which we have recommended in recent weeks, have rallied strongly year-to-date, thereby reducing near-term upside. Hence we advise investors to look at other market sectors battered by political unrest and the fall in consumer spending.

Valuations are looking more attractive in the residential-property sector, where our analyst has upgraded his rating on SPALI (Supalai) to “buy” and raised the target price by 27 per cent to Bt21. This is based on 2014F earnings growth of 40 per cent and its plan to launch 26 projects worth Bt33 billion this year, up 86 per cent year on year.

Other small-cap stocks we like at current levels are JAS (Jasmine International), STEC (Sino-Thai Engineering and Construction) and BCP (Bangchak Petroleum).

Among big caps, we like BBL (Bangkok Bank), our top pick in the banking sector, because of its attractive valuation, laggard share-price performance and positioning as a beneficiary of an export-led recovery.

Research Department

Trinity Securities

The SET Index rose to 1,350 points as expected. The index’ valuation gap and that of the MSCI World Index came closer to the long-term average.

We expect the SET Index may not move sharply as it did previously on expectations of each stock’s XD effect. March XD effect is expected to be 7.9 points and April’s 12.1.

Investors who want to accumulate stocks are suggested to wait for market consolidation during the day or week. The SET Index will be attractive for stock accumulation at 1,310-1,330 points. The gauge is expected to move sideways up to 1,450 points, as we target, by the middle of this year.

The expected rise to 1,450 comes after our finding that since the political crisis in 2006, the SET Index usually moved sideways-up after the first day of a political crisis and rose to the previous six months’ level before the crisis. In the current political crisis, the index is projected to increase to 1,450 points in the June-July period.

Another support factor is the foreign capital expected to flow into Thailand in the middle of 2014, given the European Central Bank’s monetary easing. It is highly possible for the ECB to launch some measures to lower risks of deflation after inflation remained the lowest in four years.

Investment strategy: The XD effect will not prompt sharp movement of the SET Index like previously. Wait for stock accumulation when the SET Index lowers during the day. Monthly stock picks are as follows.Global economic recovery plays: SCC (The Siam Cement Plc), CPF (Charoen Pokphand Foods).